Volatility has been the name of the game on Wall Street for much of this decade. The COVID-19 crash saw the major indexes plummet into bear market territory in a matter of weeks, while the 2021 bull market sent Wall Street soaring to new heights. This was followed by another bear market in 2022 and a furious rally out of the gates for growth stocks this year.
When equities are whipsawed on Wall Street, investors turn their attention to time-tested outperformers, such as the FAANG stocks.
When I say "FAANG," I'm referring to:
- Facebook, which is now a subsidiary of Meta Platforms (META 0.43%)
- Apple (AAPL -0.35%)
- Amazon (AMZN 3.43%)
- Netflix (NFLX -0.63%)
- Google, which is now a subsidiary of Alphabet (GOOGL 10.22%) (GOOG 9.96%)
Image source: Getty Images.
Over the trailing decade, these five stocks have absolutely run circles around the broad-market indexes. In order, Netflix, Apple, Amazon, Meta Platforms, and Alphabet (Class A shares, GOOGL) have respectively gained 1,122%, 1,066%, 743%, 726%, and 466% since Aug. 2, 2013. By comparison, the S&P 500 is higher by "just" 164% over the trailing-10-year period.
Competitive advantages are what fuel the FAANG stocks.
- Meta Platforms' top-notch social media real estate lured nearly 3.9 billion monthly active users (MAUs) across its family of apps in the June-ended quarter.
- Apple has consistently held the majority share of U.S. smartphone sales for years, and it boasts Wall Street's beefiest capital-return program -- $586 billion in share buybacks over the past 10 years.
- Amazon accounts for approximately 40% of U.S. online retail sales and is the world's leading provider of cloud infrastructure services via Amazon Web Services.
- Netflix is the domestic and international market share leader in streaming services.
- Alphabet's Google has topped 90% of global internet search share every month for more than eight years.
These are dominant companies that generally bring in a boatload of cash flow and/or reinvest a mountain of operating cash flow back into their respective businesses.
That said, not all FAANG stocks are cut from the same cloth. As we move into August, one FAANG stock stands out as a no-brainer buy, while another tried-and-true outperformer would be best avoided by investors.
The FAANG stock that's a no-brainer buy in August: Meta Platforms
Despite already being the top-performing FAANG stock in 2023, social media company Meta Platforms is the no-brainer stock to buy in August.
Let's tackle the elephant in the room: The advertising environment is challenging. Meta generated 98.43% of its $32 billion in second-quarter sales from advertising, which means its success and the success of its ad-driven social media platforms are tied at the hip to the health of the U.S. economy.
Certain economic data points and recession-probability tools do suggest the U.S. economy could weaken later this year or perhaps in early 2024. But it's important to widen your investing lens and look at how ad-driven companies perform over long periods.
Even though downturns are a perfectly normal part of the economic cycle, all 12 U.S. recessions following World War II lasted between two and 18 months. On the other hand, periods during which the economy expanded were almost always measured in multiple years.
A company like Meta, which attracted 3.88 billion MAUs to Facebook, Instagram, WhatsApp, and Facebook Messenger in the June-ended quarter, won't have any trouble commanding superior ad-pricing power during these disproportionately long periods of expansion.
Meta Platforms has also demonstrated that it can pull levers when necessary. One of the factors that sparked its triple-digit rally this year was its reduced total expenses forecast. Even with this full-year spending forecast bumped up a tad to account for legal expenses incurred during the second quarter, it shows that management is being mindful of costs in a rising interest rate environment.
Something else for investors to consider is that Meta has the available cash and ongoing cash flow from operations to take chances that virtually no other social media platforms can. The company closed out June with $53.4 billion in cash, cash equivalents, and marketable securities compared to $18.4 billion in long-term debt. That's approximately $35 billion in net cash, which comes atop the $31.3 billion the company has generated in net cash from operating activities since 2023 began.
The metaverse remains an opportunity that could provide significant revenue for the company later this decade. Although Reality Labs is losing money hand over fist -- $7.73 billion in operating losses through the first six months of 2023 -- the spending that CEO Mark Zuckerberg is overseeing in virtual/augmented reality puts the company on track to become an eventual on-ramp to the metaverse.
If you need one more solid reason to buy Meta stock, let it be the company's still inexpensive valuation. Over the trailing five years, Meta has traded at an average price-to-cash-flow multiple of 15.8. Investors can pick up shares right now for less than 11 times the forecast cash flow in 2024. With the exception of its 2022 swoon, it's the cheapest Meta has been, relative to its future cash flow, since becoming a public company in 2012.
Image source: Getty Images.
The FAANG stock to avoid in August: Netflix
However, not all FAANG stocks are worth adding at the moment. Among these five industry-leading companies, streaming platform Netflix can be left on mute.
To give credit where credit is due, Netflix has delivered on its first-mover advantages in the streaming space. Whereas new and legacy streaming services are bleeding red as they build out their content libraries and/or grow their subscriber bases, Netflix has been profitable on a recurring basis for years. In other words, it's shown Wall Street that its operating model works...just in case its 238.4 million global streaming paid memberships didn't already imply it.
Additionally, Netflix's free cash flow (FCF) has come in meaningfully higher than analyst expectations in 2023. All told, the company has generated $3.46 billion in FCF through the first six months of the year.
But it's not all peaches and cream for the world's leading streaming service.
Despite being profitable on an adjusted basis, Netflix's subscriber growth has meaningfully slowed due to growing competition from legacy media providers. Legacy media companies have deep pockets, rich histories, and sizable content libraries that can genuinely challenge Netflix's first-mover advantages. Both domestically and internationally, Netflix's share of the streaming market is shrinking.
Another potential monkey wrench for Netflix is the ongoing Hollywood strikes by the Writers Guild of America and Screen Actors Guild-American Federation of Television and Radio Artists. While it's certainly debatable that Netflix is in a better position than its legacy peers to withstand a lengthy strike, a protracted standoff could do sustained damage to the industry and delay new content creation. Let's not forget that Netflix's original content is what tends to draw new users to the platform and helps retain its 238 million-plus subscribers.
The third factor that should have investors thinking twice about Netflix stock is the company's valuation. On the surface, Netflix's forward price-to-earnings (P/E) ratio of 28 doesn't seem egregiously high. After all, the forward P/E ratio of the benchmark S&P 500 is 19.3 as of Aug. 2, and Netflix has historically delivered a superior growth rate to the broader market.
The issue is once you delve into cash flow. Though its cash flow is markedly improved in 2023, Netflix is regularly the priciest FAANG stock relative to Wall Street's forward-year consensus cash flow. While you can nab Meta Platforms for 10.8 times forecast cash flow in 2024, you're paying nearly 30 times cash flow to buy shares of the slower-growing Netflix. That's not a bargain for a company with a shrinking global streaming market share.
